Aug 22, 2023

SAIL and Regulation

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SAIL is a utility token issued by AdmiralDAO. SAIL does not seem to be a security per the Howey Test. Read to learn more.

SAIL and U.S. Securities Law

The regulatory environment around the world for crypto is varied and dynamic. This post will discuss how U.S. regulations apply to SAIL. Future posts may address other jurisdictions. Please note that this is not legal advice and there is no guarantee that regulators or courts will necessarily agree with this thinking and we are not qualified to render any opinions of law.

What is SAIL?

SAIL is a utility token issued by AdmiralDAO. It is used (a) to coordinate governance decision-making among Members, and (b) as a numeraire for cross-chain trades.

What is AdmiralDAO?

AdmiralDAO is a DAO of DeFi builders. It governs Clipper, the DEX for Bluechip trades.

Why did AdmiralDAO issue SAIL?

Initially, Clipper LPs composed the DAO, with each LP wielding one vote. However, coordinating decision-making among members became technically difficult. Thus, members proposed issuing a dedicated governance token called SAIL. A supermajority of voting Clipper LPs approved, and the DAO issued SAIL.

How did AdmiralDAO issue SAIL?

SAIL was airdropped to members of the community who have actively contributed to building Clipper in the past. In particular, this includes past LPs and discord members who have roles/NFTs indicating their active contributions to Clipper (e.g. community moderation, trading, and educational quests). No SAIL has been sold in any sort of ICO, presale, SAFT, or warrants. For a detailed explanation of the airdrop process and criteria, please see the DAO’s official statement on airdrop eligibility.

What is Admiralty LLC?

Admiralty LLC (“the LLC”) is a nonprofit, member-managed LLC incorporated in the Republic of the Marshall Islands. Like the Foundations used by many DeFi projects, its charitable purpose is to support AdmiralDAO and its DApps, but it is not a fiduciary to the DAO or SAIL holders. All active contributors to Clipper can apply for formal membership in the LLC. The LLC also uses SAIL to coordinate decision-making in various ways between formal members.

What is US Securities Law?

Following the 1929 stock market crash and during the Great Depression that followed, the US Congress passed the Securities Act of 1933. The premise of this Act was the idea that most problems related to securities are the result of information asymmetries between an issuer and investors. As a result, the Act mandated that issuers of a security make certain disclosures to investors. From there, Investors are free to make any investment decision they wish. In general, a security is defined by its manner of issuance; namely, whether it is sold as an investment contract. The Act then explicitly classified certain assets as securities, like equity and debt, regardless of how it is sold. There are also a number of exemptions to these requirements, mainly for smaller, private companies and those raising capital outside the US. In general, these exemptions require transfer restrictions on sales of Securities to US persons.

What are Investment Contracts?

Ironically, the Securities Act of 1933 did not define the term “investment contract”, which is a type of security. Instead, the definition was established by the US Supreme Court in the famous case of SEC vs. Howey Co, where Howey disputed whether an asset he sold was a Security and thus subject to the aforementioned requirements. The Supreme Court wrote, “For purposes of the Securities Act, an investment contract (undefined by the Act) means a contract, transaction or scheme whereby a person [1] invests his money [2] in a common enterprise and [3] is led to expect profits [4] solely from the efforts of the promoter or a third party…”  This became known as the “Howey Test,” and each of its four criteria is referred to as a “prong” of the test. A transaction that passes the test is an investment contract and thus a securities transaction; a transaction that fails the test is not. The SEC has since published guidance on applying the Howey Test to Digital Assets, which it updates periodically.

Is SAIL a Security?

No, AdmiralDAO does not believe SAIL is a security because it was not issued as an investment contract. Among other reasons, this is because in its issuance there was no “investment of money,” because no one was “led to expect profits,” and because any such profits would not be “solely from the efforts of the promoter or a third party”. These three positions will be considered in turn.

Was there an Investment of Money?

No, AdmiralDAO did not sell SAIL in any way, shape or form. At issuance, there was no ICO, IDO, IEO or the like. Prior to issuance, there were no private sales in the form of tokens, SAFTs, or Warrants. The DAO secured liquidity commitments for 1+ years from institutions at launch which included a token grant under Regulation D.  Neither AdmiralDAO and its past affiliates have never received any money from past sales of tokens or claims on tokens or as a result of the issuance itself. In short, there has been no capital formation.  Rather, SAIL has been simply airdropped to contributors. 

Moreover, there has been no ‘in-kind’ investment of nonmonetary value for tokens. Token grants were either a surprise, subject to a liquidity provider agreement with an accredited investor, or earned as income from providing services to the DAO.

AdmiralDAO’s mission includes increasing Protocol Owned Liquidity (“POL”) to ensure Clipper is the most liquid DEX.  It may in the future engage in swaps to increase POL.

Is there an expectation of profits?

No. AdmiralDAO Members should not expect dividends or profits. Neither should members of Admiralty LLC, which is a nonprofit entity. While AdmiralDAO can’t entirely control the perceptions of Members, AdmiralDAO has never set any expectation that SAIL will appreciate in value. Once again, for the record - you should not expect to profit from the future sale of SAIL.

Would profits come from the efforts of others?

No. Those who received the airdrop were all active contributors to AdmiralDAO. In other words, the recipients themselves are the members who create any profits they may later realize, not some third-party. There is established precedent that such partnership interests are not securities (see Williamson vs. Tucker). This is the case for AdmiralDAO as well as for Admiralty LLC, wherein Members cannot delegate their authority as a member, only ministerial functions. Incidentally, this motivated the decision to only airdrop SAIL in phase 1 to Clipper users who were also members of the discord community, and not to those who weren’t. Members can use SAIL to coordinate decision-making amongst themselves in various ways (e.g. Quadratic voting) and can change anything and everything about governance. For example, they vote on the product roadmap and can fire any person or entity that provides services to the DAO, including Shipyard Software Inc, even over Shipyard’s objections. Among other implications, this implies there is no Control Person. 


SAIL fails the first, third and fourth prongs of the HOWEY test, and thus does not seem to be a security.

Third Party Frameworks

The Crypto Rating Council is composed of prominent members including Bitgo, Coinbase, Circle, Anchorage, Coinbase, 0x, Coinlist, Coinbase, Cumberland and more. They publish a Securities Law Framework scorecard. The completed scorecard for SAIL is available here. The results are clear: Sail scores a 1, the least likely to be deemed a security. More specifically, on the first prong of the Howey Test (Investment of Money) it scores a “0”; on the second prong (Common Enterprise) it scores a 140; on the third prong (Reasonable Expectation of Profits) it scores a -115; on the 4th prong (Solely from the efforts of others) it scores a -55. The result is three or more prongs that have a score below 100, making it least likely to be a security under US law.

Admiral DAO + Securities Law

Decentralized Finance (DeFi) promises global access to free and fair markets, two powerful forces for positive change; they lift people out of poverty and empower people with the resources to advocate for their rights. That’s what AdmiralDAO is fighting for, and SAIL is a tool to achieve that dream.

AdmiralDAO is structured to reflect this promise. Its records are publicly available and auditable on the blockchain, and SAIL provides all members with a pathway to effect change. The elegance of DAOs is that they can avoid the previously intractable issues that Securities Law was written to mitigate in the first place, and AdmiralDAO stands ready to work with any community, regulator, or government who sees the same promise in DeFi that we do.